It includes 258,000 claimants from outside the European Economic Area, or 25 per cent of the total group.

A detailed analysis of a sample group of 9,000 non-EEA nationals – of which only three quarters of records were able to be matched – found that 98 per cent were entitled to benefits, but 2 per cent appeared to have no lawful immigration status.

Ministers said around 125 cases are now under investigation.

We will root out those claimants who can not prove their immigration status and in turn they will be stripped of their benefits.Employment Minister Chris Grayling

A sample exercise to match non-EEA claimants recorded as foreign nationals when they first registered in the UK, suggests that 54 per cent subsequently became British citizens.

Employment Minister Chris Grayling said: “We will root out those claimants who cannot prove their immigration status and in turn they will be stripped of their benefits.

“I was shocked to discover that the current system does not record the nationality of benefit claimants and we are urgently taking steps to make sure we know exactly how many non-UK nationals are claiming UK benefits.”

Immigration Minister Damian Green said: “These findings uncover a worrying issue we have inherited, which is why we’ve ordered urgent work to pursue claimants suspected of abuse and to withdraw their benefits if they cannot prove they are entitled to claim.”

‘Rhetoric and misinformation’

Chris Bryant, shadow immigration minister, said: “Tory ministers are resorting to rhetoric and misinformation to hide the reality of their failures on immigration and unemployment.

“Far from strengthening immigration control the Government is returning fewer illegal migrants and net migration has continued to increase. And at the same time increasing numbers of people born here and abroad are on out-of-work benefits because the government’s failure on the economy has pushed unemployment up.

“Ministers should get a grip of rising unemployment and weaker border controls rather than trying to hide behind questionable figures which include people who have been British citizens for many years, and don’t take account of British citizens claiming benefits abroad.”

Above: Business Correspondent Sarah Smith explains the row over who can claim benefits in Britain – video from November 2011.